Political Agency and Implementation Subsidies with Imperfect Monitoring

Abstract: Voters are frequently ill-equipped to monitor politicians' actions. Politicians are expected to implement projects, whose benefits sometimes partially accrue to interest groups and not entirely to voters. Since implementing projects is costly, interest groups have an incentive to subsidise policy-making. This paper shows how these considerations interact in a two-periods political agency model with moral hazard and adverse selection. I show how the existence of self-interested interest groups and their involvement in the policy-making process affect voters' welfare. I also show why voters do not fully monitor politicians in the presence of interest groups that might capture projects' benefits.